Is the Atlas Iron Limited share price a huge opportunity?

Atlas Iron Limited (ASX: AGO) saw its share price rise 13.3% to 1.7 cents today, after an upbeat presentation.

The iron ore miner announced that it had slashed its all in production costs from $66 a tonne 18 months ago to just $49 a tonne in the last quarter, its debt had been halved with interest costs cut by $20 million, production was running at a record annualised rate of 15 million tonnes, and there was potential for annualised $100 million of net operating cash flow based on current exchange rates and iron ore prices. Atlas has a current market cap of around $152 million.

The company also reported that the shares are currently trading at less than 2x net operating cash flow (before today’s rise) and there was significant scope to retire debt early though joint venture agreements or asset sales.

Atlas also announced that it had a number of major growth opportunities, including the potential for lithium and copper projects, which the company is exploring.

Having restructured its debt, Atlas’ bankers now own roughly 70% of the company, with US$135 million now due to be repaid in April 2021. Additionally, the miner had A$72 million in cash at the end of April 2016.

What next for Atlas?

However, while Atlas is operating at peak production, two of its major mines (Abydos and Wodgina) have less than 2 years of operating life left, leaving just Mt Webber with 7-8 years of mine life left. Abydos and Wodgina are currently producing between 7 and 9 million tonnes per annum combined.

Atlas is targeting production from its Corunna project in the December 2017 quarter, and the McPhee project in the second-half of 2018 to replace production from its existing mines.

While that may appear to be fairly simple, we don’t yet know how much capital Corunna and McPhee will need to begin production or what their actual production costs will be. Both projects could be rendered non-viable if iron ore prices sink.

Atlas has also entered into a number of profit-sharing agreements with its contractors including McAleese Ltd (ASX: MCS), mining operator MACA Ltd (ASX: MLD) and Qube Holdings Limited (ASX: QUB). Under the agreement, 25% of positive operating cashflow will be paid to the collaborating contractors, so the financials are not as simple as the company might suggest.

Atlas is also due to begin repaying state government royalties which were deferred last year until March 2016 for the next seven quarters.

Foolish takeaway

Clearly a high-risk investment, Atlas could delight its shareholders if it is successful with its growth plans. However, in reality, things never quite go as planned, and Atlas is more than likely to disappoint shareholders. Lookout below.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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